Katrina: New Bankruptcy Law May Hurt Hurricane Victims

New bankruptcy law a problem for Katrina victims (Reuters)

Hurricane Katrina is expected to cause a spurt of bankruptcy filings by storm victims — and sweeping changes in U.S. bankruptcy laws may leave them even more strapped than they otherwise might be. The Bankruptcy Abuse Prevention and Consumer Protection Act, which takes effect October 17, includes a slew of rules and restrictions intended to curb abuse. These are expected to make it harder for individuals to file to keep creditors away, and more difficult for businesses to reorganize. But the law wasn’t directed at people who file because of catastrophes such as Katrina, in which people lost homes, businesses and perhaps months of regular paychecks. Katrina has caused widespread devastation in Louisiana and Mississippi and left New Orleans, population 462,269, virtually uninhabitable.

“People who are seriously affected by this hurricane are not going to be able to file bankruptcy by October 17,” said Henry Sommer, co-editor of “Collier on Bankruptcy,” a leading reference work. “They have more pressing things in their lives, like survival.”

Michigan’s John Conyers, the ranking Democrat on the U.S. House of Representatives’ Judiciary Committee, and three other House members pledged to soon introduce legislation to provide flexibility for victims of natural disasters in bankruptcy. Conyers’ aides said legislation may be introduced next week, but aides to House Republicans said the law doesn’t need amending because it only cracks down on abuse. Aides to Sen. Russ Feingold, a Wisconsin Democrat, said he might try to postpone the October 17 implementation date.

For now, New Orleans’ federal bankruptcy court is closed indefinitely, and referring emergency filers to the bankruptcy court in Baton Rouge, which is Louisiana’s state capital. Courthouses in Alexandria, Lake Charles, Monroe, Opelousas and Shreveport are also taking emergency filings. But there may be a reprieve soon. A spokesman for the Administrative Office of the U.S. Courts said officials there are asking Congress to let federal district and bankruptcy courts in New Orleans move temporarily, perhaps to Baton Rouge or Shreveport.

This one seems an easy fix. Clearly, the changes to the bankruptcy law weren’t targeting victims of natural disasters. A quick waiver can be applied to people in the affected areas and the law modified to close this rather unfortunate loophole.

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College. He's a former Army officer and Desert Storm veteran. Views expressed here are his own. Follow James on Twitter @DrJJoyner.


  1. ken says:

    What the bankrupcy law says is that those people who had borrowed money against real property, and used the property as collateral for the loan (in other words a regular mortgage arrangement) are also personally liable for the repayment of the loan.

    The lender no longer needs to be satisfied in just taking back the property; they can now go after other assets and put a lien on the persons future income until the loan is repaid in full.

  2. Richard Cohen, Centerville, MA says:

    Kenneth: your understanding of the bankruptcy law –even the stricter, more punitive form to go into effect 10/17– is fundamentally incorrect. It is precisely the unsecured deficiency left over after secured collateral is sold (e.g., after a foreclosure sale, after sale of a repo’ed vehicle) which is “discharged”. This hasn’t changed since the first bankruptcy laws were passed in So. Carolina in 1806. What we will face is the higher hurdles for a debtor to jump to show he is “entitled”. The cynical way this new law was bought and paid for by the credit card companies is for another day. For that matter, however, debtors will continue to default as life’s events overtake them, subvert their plans, etc., and if the bankruptcy nanny-state overseers decide that a debtor is not “entitled” to a fresh start, then debtors will still be unable to pay, and credit card companies will face overloaded state courts to try to effect collection, people will stop leaving their funds in banks where they can be stripped electronically, they will stop using these dangerous credit cards (not a bad result), and we will all hunker down to low-level financial cat and mouse.